Vladivostok, located in Russia’s Far East, hosted the 8th Eastern Economic Forum (EEF), on 10th to 13th September 2023, in an attempt to define further the development of this remote region. Since the introduction of the EEF in 2015, until the Covid-19 that was followed by Russia’s own ‘special military operation’ in neighbouring Ukraine, has largely focused on harnessing resources from Asia-Pacific, the United States and Europe to the Far East region of the Russian Federation.
Speeches and all kinds of remarks highly praised Western, European and Asia-Pacific participating countries and corporate enterprises, under resonating themes such as ‘A Common Economic Space from the Atlantic to the Pacific: The Greater Eurasian Partnership’ which was framed to develop trade and economic cooperation from Lisbon to Vladivostok. Research shows that the EEF held previously, especially the first three in 2015 to 2018, strategically aimed at broadening international cooperation, and promoting Far East as the gateway to the Asian-Pacific region.
Despite the series of sanctions, corporate European businesses are still highly interested in Russia and Russia recognizes the enormous significance and invaluable contributions of these businesses in its economy. Foreign Minister Sergey Lavrov, during those hay years, had always been the guest speaker during the Association of European Business (AEB), an organization which unites European companies in the Russian Federation.
“We value opportunities for dialogue with European entrepreneurs aimed at pushing forward a pragmatic, politics-free and mutually beneficial agenda designed to improve the wellbeing of the people in Russia,” Lavrov said, and rained a lot of praises when the AEB marked its 25th year early October 2020. The interest in strengthening and diversifying trade and economic ties had grown since Soviet collapse. According to statistics, the European Union investment in Russia reached almost US$300 billion back in 2019.
Russia is ready to build its relations with the European Union along some principles. The European Union remains as its important trade partner. As before, there is optimism that both are open to cooperation, European partners are keen on building businesses in the economic space from Lisbon to Vladivostok, this vast country and in the Eurasian region.
Obviously, the future Russia and European business relations could still be consolidated despite the current political differences. After all, Russia and the EU countries not only belong to the same cultural and civilizational matrix, but are also linked by many ties in trade and investment cooperation, scientific and technological exchange and personal contacts. More and more Russians spend their vacation in Europe. There are visible signs that Europeans are interested in Far East development projects and participating in diverse spheres in the economy there.
Even long before Covid-19, Russia continued working on attracting investment to the Far East from external countrues and enterprises. Outcomes of 2019 forum (that was the 5th forum) released by the forum organizers, for instance, showed that among the 65 countries represented were Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Great Britain, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Slovakia, Spain, Switzerland, Sweden and the United States.
The 2019 forum business dialogues included ‘Russia-Europe’ among the six for that year. And one of the expert business lectures was United Kingdom on economics and international relations. The session was moderated Sergei Brilev, Russia TV Channel Anchor and Deputy Director and President of the Bering Bellingshausen Institute for the Americas. And there at the session, Vladimir Putin acknowledged hosting over 8,500 participants from 65 countries. Since the first forum, representation had increased more than twofold, a convincing indication of growing colossal interest in opportunities offered by the Russian Far East.
Prime Minister of Japan Shinzō Abe: “I want you to spread the wings of imagination and see the new opportunities Japan can bring into your future. Let us create history together, let us pave the way.”
Prime Minister of Malaysia Mahathir Bin Mohamad: “It was great to hear that of all regions, Russia is going to develop the Far East. Russia is one of the few countries that is located both in Europe and in Asia. Its unique geographical location makes it a bridge between East and West, between Europe and Asia. I suppose this unique situation will help Russia play an in important role in both Europe and the Far East.”
“We are still going to aim high. At the same time, if prior to the first EEF five years ago you would have asked me to guess the future – I don’t think I would have said 1800 projects. Perhaps, I would have been ambitious enough to guess 300, and I would have thought that daring. 1800 projects launched in the Far East – it is simply amazing. I am confident: the preferential economic policy, initiated at the behest of the President of the Russian Federation works,” said Yuri Trutnev, Deputy Prime Minister of the Russian Federation, Presidential Plenipotentiary Envoy to the Far Eastern Federal District.
“The 5th anniversary Eastern Economic Forum was record-breaking in terms of participation numbers and the total worth of contracts signed during the event. These accomplishments prove that the Forum became a significant platform to promote international cooperation and discuss relevant global and regional economic issues,” said Anton Kobyakov, Advisor to the President of the Russian Federation, Executive Secretary of the Eastern Economic Forum Organizing Committee.
Over the past few years, brief analytical summaries show an increasing trade relations between Russia and China. In particular, and from geopolitical point of view, China is moving towards attaining its global status within the evolutionary processes of multipolarity. China is building on its potential facilities and institutional tools to penetrate through the Far East to central Asia and former Soviet republics.
That however, with the complexities and contradictions of the geopolitical situation, Russia has abandoned its initial post-Soviet Western and European dreams. United States, Europe and the Baltics were all deleted from Russia’s radar. Russia is partitioning rather than pursuing an integrative multipolar world. At least, these are visible within the framework of its foreign policy.
Outcomes of the 4th EEF (September 2018) held under the theme ‘The Far East: Expanding the Range of Possibilities’ was significantly not different. It featured the President of the People’s Republic of China Xi Jinping, President of Mongolia Khaltmaagiin Battulga, Prime Minister of Japan Shinzō Abe, Prime Minister of the Republic of Korea Lee Nak-yon.
President of the People’s Republic of China Xi Jinping emphasized: “The Eastern Economic Forum, established by the initiative of President Putin, has already been successfully held three times and has become an important platform for consolidating brainpower and discussing key cooperation-related matters. This year the Forum is attended by an unprecedented number of guests and friends from different countries.”
President of Mongolia Khaltmaagiin Battulga said: “The Annual Eastern Economic Forum is becoming an important discussion platform for outlining further ways of cooperation for the APR countries. Each year the level of participants is rising, and the Forum is expanding.”
Prime Minister of Japan Shinzō Abe: “Russian–Japanese relations are now going through a breakthrough period with unprecedented acceleration. The plan of bilateral cooperation that we discussed with President Putin includes over 150 projects. Over a half of them are already being implemented or are approaching this stage.”
Prime Minister of the Republic of Korea Lee Nak-yeon said: “Leaders of the Northeast Asian states have gathered at this platform to consolidate efforts and ideas for the development of the Far East and ensure peace and well-being for the region. This is crucial.”
Over 340 heads of foreign businesses took part in the forum. There were 6,002 delegates and 220 agreements worth 3.108 billion roubles were signed (only agreements, the value of which does not constitute a commercial secret). The most significant agreements were:
● Baimskaya Mining Company, KAZ Minerals PLC, Government of Chukotka Autonomous Area and the Ministry of Economic Development of Russia signed an agreement in the amount of 360 billion roubles on the implementation of the investment project to develop the Baimskaya ore zone (Chukotka Autonomous Area);
● United Aircraft Corporation (UAC) and Aeroflot signed an agreement in the amount of 210 billion roubles on the consignment of Sukhoi Superjet 100 aircrafts;
● Nakhodka Fertilizer Plant and Far East Development Corporation signed an agreement to create a clean methanol and ammonia production facility;
● NOVATEK, Government of Kamchatka Territory and Ministry for the Development of the Russian Far East signed an agreement in the amount of 69.5 billion roubles on the construction of a terminal for transshipment and storage of liquefied natural gas;
● Russian Direct Investment Fund (RDIF), Japanese conglomerate Marubeni Corporation and AEON corporation signed an agreement on the terms for financing the construction of a chemical cluster in Volgograd;
● The Russian Direct Investment Fund, Alibaba Group, MegaFon and Mail.Ru Group announced a new strategic partnership to integrate Russia’s key consumer internet and e-commerce platforms and launch a leading social commerce joint venture in Russia and the CIS
● Leonid Petukhov, CEO of the Far East Investment and Export Agency, and Yoichi Nishikawa, CEO of Iida Group, signed an agreement in the amount of 14.960 billion roubles on cooperation in the implementation of the project for the construction of a wood processing complex for the production of sawn timber for wooden model houses, as well as the construction and sale of wooden low-rise houses;
● Aysen Nikolayev, Acting Head of the Republic of Sakha (Yakutia), and Yuri Korotaev, CEO of Duracell Russia, signed the agreement in the amount of 15 billion roubles on interaction in the area of social and economic development of the Republic of Sakha (Yakutia);
● Dmitry Kobylkin, Minister of Natural Resources and Environment of Russia, and Yuri Korotaev, CEO of Duracell Russia, signed an agreement on mutually beneficial cooperation in the establishment of a new class 2 waste management system;
● Rosneft and Beijing Gas Group Co. Ltd. signed an agreement to secure the essential conditions for the establishment of a joint venture for the construction and operation of a network of gas filling compressor stations (CNGS) in Russia;
● Gazprom and Mitsui & Co. Ltd. signed a memorandum of understanding on the Baltic LNG project, in order to consider the opportunities for cooperation in the project;
● Far East Development Corporation and Rostelecom PJSC signed an agreement on connecting the 18 advanced special economic zones in the Far East to fiber-optic communication lines;
● Novatek and Rosatomflot signed an agreement on the intention to jointly develop and build an icebreaker fleet operating on LNG.
The 6th Eastern Economic Forum (2021) held at the time when restrictions were still in place due to the risk posed by the coronavirus. This, of course, affected the number of participants at the event. Nevertheless, more than 4,000 participants, including more than 400 heads of companies. Western and Europeans disappeared from the forum. Online guest speakers included President of the Republic of Kazakhstan Kassym-Jomart Tokayev and President of Mongolia Ukhnaagiin Khürelsükh. There were also video greetings by President of China Xi Jinping, Prime Minister of the Republic of India Narendra Modi, and Prime Minister of the Kingdom of Thailand Prayuth Chan-o-cha.
In addition to the usual discussion on Far East, there was on the agenda the Greater Eurasian Partnership. A range of topics came under the spotlight, including the values of young people from the Far East, obstacles encountered by young entrepreneurs, the education system, the impact of social media, the future of the financial market, copyright, raising investment, getting young people involved in developing the urban environment, career guidance, cooperation with young people in other countries, and the adaptation of the tourist industry.
But a record 380 agreements were signed worth a total of RUB 3.6 trillion, (excluding agreements where the figures were classified as commercial secrets), according to the official documents. Twenty-four of these were signed with foreign and international companies, ministries, and government bodies, including nine with China, six with Japan, three with Kazakhstan, and one each with Austria, Vietnam, Canada, Serbia, South Korea, and Ethiopia.
Quite recently, the 7th Eastern Economic Forum concluded also in September 2022. With the major challenges that Russia is facing from sanctions, the macro-region’s importance is growing rapidly. Russian President Vladimir Putin noted that enormous contribution to building business ties between Russia and the countries of the Asia-Pacific region. He remarked that “there is already a trend of the Asia-Pacific region becoming a centre of world economic activity, along with the gradual extinction of industrial centres in Europe and the United States.”
It was the first post-COVID forum and was attended by more than 7,000 guests, according the forum documents. Despite the sanctions and external pressure, 2,729 investment projects are being implemented in the Far East. More than 290 agreements were signed for a total of RUB 3.27 trillion, including agreements on infrastructure and transport projects, the development of large mineral deposits, as well as construction, industry, and agriculture. More than 7,000 participants from 68 countries and Russia’s territories, including 1,700 business representatives from 700 companies. Western and Europeans disappeared at the 2022 forum. Asian countries have become new centres of economic and technological growth and points of attraction for human resources, capital and industries.
Adviser to the Russian President and Executive Secretary of the EEF 2022 Organizing Committee, Anton Kobyakov, remarked that “Vladivostok could become Russia’s international tourist gateway to the Asia-Pacific region. Let foreign tourists come and bring their relatives and friends.” But the new opportunities mean work needs to be intensified with only friendly countries.
Under the theme “The Path to Partnership, Peace and Prosperity” for the year 2023, Southeast Asian business community, in particular, expressed an active interest in Russian projects and a readiness not only to talk but also to take concrete action, according to Business & Financial newspaper Izvestia.
“The main issue is agreements on cooperation, technological interaction and the creation of joint ventures. And one thing is certain: The Far East becomes the primary location for potential developments and availability of multiple opportunities,” Georgy Ostapkovich, Director of the Center for Market Studies at the Higher School of Economics (HSE University), noted. He emphasized that it is currently difficult to quantify the number and value of contracts signed at the event. Analysts had predicted that the number of contracts inked at EEF-2023 would be the same as last year, which came in at around 3.2 trln rubles (US$33.08 bln).
Russian President Vladimir Putin said at the opening session that the government would not allow the pace of development to slacken in the Russian Far East as it is a strategic region for the country. “We will definitely not be scaling down the pace of development in the region because the development of the Far East is an absolute priority for Russia, a direct priority for Russia as a whole for the entire 21st century, because it is a colossal region with a small population but huge potential. Of course, this is a strategic interest for the country,” the president said at the Eastern Economic Forum, which Vladivostok hosted on September 10-13.
The Eastern Economic Forum (EEF) is held annually in cooperation with the Far East regional administration in the city of Vladivostok. Three years of COVID-19, followed by Russia’s ‘special military operation’ and the current geopolitical situation, have not affected this corporate business event, as Russia looks towards the East and makes the main focus on developing the Far East. One of the crucial elements or components, which is missing to see the most essential results since its launch in 2015.
For the past few years, Western and European businesses have largely been missing in this forum. And those from Asia and the Pacific are getting used to the EEF format as speeches have the same message relating to world geopolitics. Analysts, expressing much concern, say business people are really looking for corporate business opportunities, not hard geopolitics. From the perspective of investors, the region is of serious interest, but there is an imbalance between practical investment and economic potentials in the region.
Many of the speakers were very frank and objective in their speeches, highlighted possible ways for modernizing the region. It is equally important to highlight concrete success stories. In other words, reshaping and scaling up efforts are necessary leading to cutting the white ribbons marking the completion of projects. The Eastern Economic Forum was established by decree of President of the Russian Federation Vladimir Putin in 2015 to support the economic development of Russia’s Far East and to expand international cooperation in the Asia-Pacific region.
Given the vast territory of the Far East, 6.3 million people translates to slightly less than one person per square kilometer, making the Far East one of the most sparsely populated areas in the world. Until 2000, the Russian Far East lacked officially-defined boundaries. A single term “Siberia and the Far East” often referred to Russia’s regions east of the Urals without drawing a clear distinction between “Siberia” and “the Far East”. That however, the Far East is generally considered as the easternmost territory of Russia, between Lake Baikal in Eastern Siberia and the Pacific Ocean.
A New Horizon for Kazakhstan’s Economy
On September 1, President of Kazakhstan Kassym-Jomart Tokayev delivered an address that outlined the nation’s priority areas for development. Primarily focusing on Kazakhstan’s economic trajectory, the President’s remarks have a significant impact on the activities and initiatives of public authorities, including quasi-public sector companies like Samruk-Kazyna, a sovereign wealth fund of Kazakhstan, which owns several major companies in the country.
Rethinking Tariff Policy
President Tokayev emphasized the necessity of reforming the tariff policy and introducing adequate market tariffs for entities subject to natural monopolies. This marks an important shift from the existing approach, which has reached its limits. Adopting a cost-plus principle for tariffs will enable us to discontinue subsidies to the economy. This, in turn, will facilitate timely preventive maintenance, thereby reducing the risk of industrial disasters. This policy overhaul will ensure break-even in the areas of activity, bolster the investment attractiveness of our companies and a number of industries, and ultimately lead to increased dividends and social payments. We have already been collaborating with the Government to systematically increase tariffs, taking into account the 10-12% inflation corridor set by regulators to ensure social stability.
Focusing on Exploration
Tau-Ken Samruk, our national mining company, is currently engaged in exploration projects with leading international companies like RioTinto, Fortescue Metals Group, and others. With Kazgeology joining the structure of Tau-Ken Samruk this year, the number of exploration projects has increased from 15 to 45, expanding the exploration area from 1887.7 km² to 13,609 km². Notably, we are focusing on copper, gold, lead, and zinc, as well as rare metals like tungsten, molybdenum, and yttrium. Joint ventures registered in Kazakhstan will own the extraction rights to these minerals if confirmed. Geological exploration work will be carried out not only by Tau-Ken Samruk, but also by the world’s largest uranium producer Kazatomprom, national oil and gas companies KazMunayGaz and QazaqGaz in their areas of activity.
Energy Goals for the Next Five Years
The President has set a goal to commission 14 GW of new energy capacity over the next five years. This includes the Samruk-Kazyna projects aimed at restoring the first unit of Ekibastuz GRES-1, a coal-fired thermal power station, expanding GRES-2, and constructing GRES-3. These initiatives focus on traditional coal energy.
In addition, the Fund’s portfolio features gas generation projects, the largest of which involve the reconstruction of Almaty CHPP-2 and CHPP-3, as well as the construction of a combined cycle power plant in the Turkestan region.
Special emphasis is being placed on the development of renewable energy sources, particularly hydroelectric power plants. Plans include constructing wind farms with a capacity of up to 5 GW in collaboration with foreign partners such as Total Eren, Acwa Power, Power China, Masdar, and China Power International Holding. The projects also encompass the construction of counter-regulators for Kapshagai HPP and Shulba HPP.
According to forecasted data, a capacity increase of approximately 9 GW is expected by the end of 2028.
Transport and Logistics
Strategic upgrades are in progress to improve our existing transport infrastructure and eliminate bottlenecks. Several significant infrastructure projects are currently underway, including the construction of second lines on the Dostyk–Moiynty section, and the development of new railway lines: Bakhty–Ayagoz, Darbaza–Maktaaral, as well as a bypass line around Almaty.
Alongside the widespread modernization of railway infrastructure across the country, the North–South transport corridor stands out as a promising focus area. Plans are in place to upgrade railway sections leading to the Bolashak station, which is located at the border with Turkmenistan.
Simultaneously, initiatives to boost terminal capacity are in the works both within Kazakhstan and abroad. Noteworthy projects include establishing a container hub in Aktau, constructing a terminal at Xi’an port in China, and creating a dry port at Bakhty station, among others. Kuryk port is receiving special focus; the construction of its ferry complex is nearly complete, and activity along the Trans-Caspian International Transport Route is ramping up.
The expected economic impact of these initiatives is substantial, with freight traffic projected to increase by an estimated 50 million tons annually. These efforts aim to transform Kazakhstan Temir Zholy, Kazakhstan’s national railway company, into a comprehensive transport and logistics enterprise.
Top of Form
Economic development on horizon
Kazakhstan is at a historically significant crossroads. The President’s address underlines a multitude of opportunities that we are keen to seize. For decades, Samruk-Kazyna has collaborated with international entities, and we firmly believe that collective business efforts are the most effective approach for the 21st century.
To attract major long-term investors, stability and clear profit plans are essential. In line with the President’s recommendations, we are refining our tax policy to make it more investor-friendly, among other initiatives. These comprehensive efforts not only offer us a robust toolkit for economic development but are already yielding tangible results. I have immense faith in Kazakhstan’s economic potential and am confident that the global business community will recognize and appreciate the favorable conditions being nurtured in our nation.
The High Percentage of Informal Employment in Indonesia: Causes and Implications
In most developing countries, the informal economy accounts for a large portion of the national economy and it often has a negative connotation because of inferior working conditions, low-productivity firms, and disrespect for the rule of law. The firms and workers as well as their output and production activities that are unregistered and do not pay taxes account for a significant and growing share of total economic activity. In Indonesia, BPS-Statistics Indonesia (BPS-Statistic Indonesia, 2022) records that the informal sector reaches 59.31% with more informal economy workers in rural areas. It captures three provinces including Papua (84,11%), West Sulawesi (77,25%), and West Nusa Tenggara (75,36%), with the highest percentage. The informal sector – where most MSMEs operate – employs more than 61 percent of Indonesia’s total workforce (The World Bank, 2010). From a government or formal perspective, the large participation in the informal sector becomes an issue that must be resolved because restricts the government’s ability to provide support for public goods and services (tax issue) and hinders economic growth.
In addition, policy-makers assume that their status (as companies and informal workers) would put them at a disadvantage relative to formal firms because they may not be able to legally obtain credit from formal financial sources, access government programs or facilities, or export products. The fact that is not surprising anymore is, even though actors in the informal sector know those losses mentioned by the government, most of them remain in their position. This phenomenon is interesting to examine because it has a lot to do with economic growth, social welfare, human capital, institutional issue, to development in various sectors. Therefore, this paper will analyze why the percentage of informal employment remains high in Indonesia despite many efforts by institutions and state agencies.
The Informal Sector: Exclusion & Exit Theory
Informal employment is a phenomenon in which firms and workers are unregistered with social security administrations, meaning their work activity and income are outside the tax control of the state and of the legal provisions in labor matters – most of them are small firms. Some literature analyzes the reasons firms or workers choose to remain in the informal sector on the one hand and the reasons other companies register their firms (and workers) and pay taxes. Perry et al. (2007) highlight informality through two lenses, exclusion & rational exit. The exclusion theory argues that the informal sector exists because workers could not find jobs in the formal sector, more precisely they are excluded from critical state benefits or modern economic circuits. Those exclusions include segmentation in the labor market, burdensome entry regulations that prohibit small firms shift to formality and growth, and informality as a defensive measure toward excessive tax and regulatory burdens. Therefore, the rational exit theory states that the net benefits of joining the formal sector are negative. Firms and workers choose to engage with formal institutions based on cost-benefit analysis, depending on their assessment of the net benefits associated with formality and the state’s enforcement effort and capability. This view suggests that high informality results from a massive choice to leave formal institutions by firms and individuals. It implies societal demand on the quality of the state’s service provision and enforcement capability.
They also argue that formality increases rapidly with firm size and productivity. So, formality can be seen as an input in the production process that is not really needed by small firms. However, most micro firms remain too small to benefit sufficiently from formality to overcome their various costs (a survey of informal Mexican micro firms). Other reasons are the high costs and time required to register or the high costs of operating as a registered business. In their research, the degree of formality increases as the firm grows larger and their demand for formalization increases, as does the probability of detection by authorities. Firms choosing to register do have better performance or, the firms that started operations being registered exhibit higher levels (on average) of labor productivity than their equivalent unregistered peers (survey in Latin America). However, there is evidence that, in some cases, informality reflects defensive evasion of possibly excessive regulation. In short, firms not only consider the cost and benefit of formality but their environment that does not demonstrate demand for its expected benefits also influences their decision. For the last, even if the government reduced registration costs, it would not lead to formalization. In other cases, such as unskilled workers – with lower formal wages, they may find that paying social protection and expected returns from a formal job do not exceed their consumption or greater flexibility and income they can get as informal workers. Especially when they have social protection alternatives from private or noncontributory programs (Perry et al., 2007). However, informality is a multidimensional phenomenon in which exclusion and exit mechanisms depend on each country based on its institutions, historical background, and legal frameworks.
The analyses highlight the characteristics of informal workers, their motivations, and their preference for the benefits and non-monetary characteristics of jobs such as flexibility, autonomy, stability, and mobility. Most of these informal workers seem to choose their jobs according to their individual needs, particularly their desire for flexibility and autonomy, and their abilities (comparative advantage). Either independent workers (firm owner and self-employment) or informal salaried workers are related to the exclusion and exit model. Most independent workers choose their jobs voluntarily, exit the formal social protection system, and underline the non-monetary of self-employment. In contrast, most informal salaried workers are excluded from more desirable jobs, either as formal workers or self-employed. They also choose not to contribute to social security and health insurance plans (exit) mainly because of low incomes and their employer’s decision not to offer benefits. Based on Perry’s research in Latin America, most of the self-employed do not appear to be excluded from the formal sector but they choose to exit (rationally, cost-benefit) of formality. They considered their minimal human capital, access to other assets, and low aggregate productivity in the economy. Informal employment then becomes a better option than suitable jobs in formal ones.
The dualism of the Informal Sector
Furthermore, Rizki, Suryadarma, & Suryahadi (2020) used dual economic theory in their research on informal workers in Indonesia in the 1996-2014 period. The dual economy theory argues that the informal and formal sectors co-exist, and are fundamentally different. They produce different products, with different labor, capital, and technological inputs that automatically have different productivity levels, and also pay different levels of wages and serve different consumers. This theory assumes that changes in registration costs will have no impact on the size of the informal sector in the dual economy model. Only economic growth could solve this issue because it will reduce the size of the informal sector while encouraging the formation and expansion of formal firms (Rafael La Porta & Andrei Shleifer, 2014).
Based on Rizki et al. research, Indonesia with its large informal sector in which 57 percent of the 125 million working population are informal workers (50% in the non-agriculture sectors since 2000), the transition from informal to formal jobs is very gradual and can be rapidly overturned by an economic crisis. Although, indeed, between 1996 and 2014, they found evidence that the informal sector seemed to shrink along with economic growth, however, it took a very long time. The results from the first job trend examination show individuals whose first job was as a low-tier informal (LTI) worker, almost half remained in that position through the next 8 to 19 years, and another 45 percent became low-tier formal (LTF) workers for at least one year. Their findings emphasize that the dual economy is divided between low-tier and high-tier employment, rather than informal and formal employment. Even if they shift, they are still at a low-level of employment. However, they have a relatively good chance of switching to LTF work because of the earnings premium that LTI could gain is large and statistically significant (42%). Hence, the research recommends, instead of creating policies that try to encourage low-level informal sector workers to become high-tier informal sector workers – as most policymakers in developing countries desire, the government should be advised to create jobs, even if low-tier ones, that LTI can apply for.
Another research from William, Horodnic, & Windebank (2017) on the dual informal labor market with a case study in the European Union. They see the informal economy both as the ‘exclusion’ and ‘out’, and as internal dualism of it. The evaluation was carried out on a dual informal labor market composed of an exit-driven ‘upper tier’ and exclusion-driven ‘lower tier’ of informal workers. Their analysis resulted in the finding that 24% of participants did so for pure exclusion reasons, 45% for pure exit reasons, and 31% for a mixture of both exclusion and exit rationales. So, it is not purely for exit or exclusion rationales, instead, there is an internal dualism of the informal sector, with some involved in the informal sector being exit, others exclusion, and yet others driven by a mixture of both motives. However, the weight given to exit and exclusion is not uniform across the European Union. Exclusion is more common in Southern Europe and East-Central Europe but less in Nordic nations and Western Europe. Based on their analysis, the exclusion-driven ‘lower tier’ was identified as more likely to be populated by the unemployed and those living in East-Central Europe, and the exit-driven ‘upper tier’ by those with fewer financial difficulties and who live in the Nordic countries. In sum, the informal sector is not purely a necessity-driven realm for excluded populations or purely a result of a desire to exit a burdensome and over-regulated formal sector, it is a mixture of both exclusion and exit rationales.
In addition to examining the phenomenon of the high percentage of informal employment in developing countries through the perspective of economic literature, the author will also look at it from an institutional perspective. Williams & Harodnic (2015), through the lens of institutional theory, reveal that there is a strong relationship between tax morale and participation in the informal economy. The lower the level of tax morale, the higher the level of participation in the informal economy. They mention that not only formal institutions (codified laws & regulations) – government morality – define institutional strength (non-compliance; enforcement) but also informal institutions (societal morality) such as norms, values, and principles. So, in the case of the informal economy, they argue that there is an asymmetry between government morality and societal morality, thereby resulting in a large percentage of the informal economy. The finding (case: the UK population) is people who participate in the informal economy have significantly lower tax morale than those in formal ones.
Indonesia’s Informal Employment
Based on the literature reviews and theories above, the author observes that in the Indonesian case, the exclusion theory is not really relevant (directly) as a reason for the high percentage of the informal sector, especially since the period 2018-after the pandemic COVID-19 until now. During that period, the government amended and passed regulations that ease and facilitate access for MSMEs and workers to enter the formal economy. For instance, the central government has also reduced registration fees (Directorate General of Intellectual Property, Trademark) and business taxes (1% to 0.5%) (Directorate General of Taxes) which have been implemented since 2018, but participation in the informal economy is still large. There are still many informal economy actors who are reluctant to transform into the formal sector. They still assume that the procedure for formalizing (registration) their business is too complicated – and expensive, although the government has reduced and simplified registration. Even the registration of the Taxpayer Identification Number (Nomor Pokok Wajib Pajak/NPWP) – as a requirement for access to capital loans at the Bank, paying taxes, and reporting the Annual Tax Return (Surat Pemberitahuan Tahunan/SPT) can be done at the tax office or through the online site at pajak.go.id which incidentally makes it easier for the community (theoretically). On the other hand, the formation of the Job Creation Law No. 11/2020 (widely known as the “Omnibus Law”) should also support informal workers and MSMEs to shift, but this is not the case.
The high informal sector in Indonesia is more relevant viewed through a rational exit lens in which MSMEs (and workers) choose to be informal because the costs of formality are greater than its benefits. They assume that formalizing their enterprises (mostly small one) are costly and not worth the benefits they get. They have to pay business taxes (Article 2 (5) Law No. 36/2008 on Income Tax; Government Regulation (PP) No. 23/2018 on Income Tax) and have to deal with regulations related to employment (the Job Creation Law No. 11/2020), product certification, and they have to pay business taxes (Article 2 (5) Law No. 36/2008 on Income Tax; Government Regulation (PP) No. 23/2018 on Income Tax) and have to deal with regulations related to employment (the Job Creation Law No. 11/2020) and product certification, and procedures they find complicated and time-consuming to perform. Most of the MSMEs in Indonesia are small – and mostly run by the lower middle class. Lower middle-class informal actors prefer to remain in the informal sector because they enjoy benefits such as not having to pay taxes – but enjoy tax advantages, wage rates that are not limited by labor regulations, not spending time with registration and administration processes that they consider complicated, and other advantages of not following the rules.
So, the author sees this as more of a human capital and societal morality issue. Small businesses and workers in the informal sector are constrained to meet standards in the formal sector due to their low capacities, such as inadequate skills, low education, and lack of knowledge about technology-digitization, which indeed affects their mentality and performance (productivity, efficiency, marketing, management). This fact is in line with the dual economy theory of informality. Furthermore, from an institutional perspective, the informal sector is a matter of enforcement and societal resistance which requires changing the values and beliefs of the population by trying to harmonize regulations and soft policies, so that trust, self-regulation, and high commitment can grow. Hence, in its implementation, the government must have clear indicators for MSME development. MSME development programs must be synergized so that they do not run separately in each ministry/institution. It is necessary to map and differentiate in handling problems based on the size of MSMEs, worker skills, and class so that empowerment is carried out on target. In conclusion, besides the significance of the institution, meaningful enforcement effort and capacity from above and societal cooperation from below, are very important indicators to create a strong institution. Lack of enforcement capacity relative to societal resistance becomes one of the causes of the high percentage of the Indonesian informal economy. It is also important to pay attention to increasing skills in line with the needs of the labor market. It seems that what is important is no longer whether they become informal (which always has a negative connotation) or formal (good one), but how to empower those at the middle and lower levels so that their capacity and morale support economic growth and prosperity economically and socially.
CBDC vs Cryptocurrency: The Future of Global Financial Order
In the rapidly evolving digital era, the global financial landscape is undergoing profound transformation. At the heart of the debate on the future of digital currency, two concepts dominate the discussion: Central Bank Digital Currency (CBDC) and cryptocurrency. While both offer distinct visions for the future of global finance, there are strong indications that CBDCs hold greater potential to be adopted as a global standard.
A study by the Atlantic Council, a US-based think tank, reveals that 130 countries, representing 98% of the global economy, are currently exploring digital versions of their currencies. Nearly half of these are in advanced stages of development, testing, or launch. All G20 nations, except Argentina, are in these advanced stages. Eleven countries, including some in the Caribbean and Nigeria, have launched their CBDCs. Meanwhile, China has tested its CBDC with 260 million people across 200 different scenarios. However, despite the global push for CBDCs, countries like Nigeria have seen disappointing adoption, while Senegal and Ecuador have halted their developments. Here are some fundamental reasons why CBDCs hold more promise than Cryptocurrencies in setting global financial standards:
1. Authority and Regulation
One of the primary advantages of CBDCs is the oversight and regulation by central banks. With a central authority controlling its circulation and use, CBDCs offer a higher level of trust and security for users and other stakeholders. CBDCs, supervised by central banks, are deemed safer due to a centralized authority ensuring consistent policy and regulation application. The ability to track and monitor transactions to prevent illegal activities, value stability, advanced security infrastructure, legal protection, and monetary control by central banks enhance user trust and security. Moreover, with central bank backing, CBDCs have backup and recovery mechanisms ensuring the digital currency’s integrity and availability.
2. Stability and Sustainability
Cryptocurrencies often face high price volatility, hindering their acceptance as a stable medium of exchange. In contrast, CBDCs, backed by central banks, are expected to offer more consistent value stability. Cryptocurrency price volatility is often driven by speculation, low liquidity, news and regulatory responses, and market immaturity. The nascent crypto market, dominated by retail investors, tends to move based on emotions like fear or greed rather than fundamental analysis. On the other hand, CBDCs, regulated by central banks, are designed for stability, expected to provide more consistent value stability than decentralized cryptocurrencies.
3. Financial System Integration
CBDCs, issued and overseen by central banks, offer easier integration into existing financial infrastructure. With full backing from central banks and existing legal and regulatory frameworks, CBDCs can seamlessly integrate into traditional banking and financial systems, facilitating cross-border transactions and exchanges with traditional currencies. For instance, Swift, a financial messaging service provider, is focusing on CBDC interoperability. They’ve initiated beta testing with several central banks and over 30 financial institutions to ensure new digital currencies operate smoothly alongside current fiat currencies. This aim seeks to address potential global fragmentation in CBDC development.
In contrast, cryptocurrencies, with their decentralized nature, might face challenges integrating with existing financial infrastructure due to the absence of a central authority and regulatory challenges, as well as acceptance by financial institutions.
4. Global Acceptance
As an official currency issued by central banks, CBDCs have the potential for widespread acceptance among nations, becoming an integral part of the global financial order. CBDCs, being official currencies issued by central banks, enjoy the trust and credibility of a nation’s monetary authority, facilitating their acceptance among the public. For instance, China’s Digital Yuan, backed by the People’s Bank of China, has seen extensive domestic acceptance. Moreover, CBDCs are designed to integrate with existing payment systems, as seen with the Sand Dollar project in the Bahamas that enables transactions via smartphones. On an international level, CBDCs can facilitate cross-border monetary cooperation, with countries like ASEAN members considering the interoperability of their CBDCs to ease trade and investment.
5. Transparency and Accountability
The ability to track CBDC transactions provides governments with an effective tool to enhance financial oversight and tax compliance. The transparency offered by CBDCs facilitates the identification of potentially unreported transactions and the detection of suspicious transaction patterns related to money laundering or terrorist financing. Additionally, with real-time monitoring, governments can promptly detect and respond to illegal activities, such as fraud, ensuring the integrity and security of their financial systems remain intact.
6. Promoting Financial Inclusion
CBDCs can play a pivotal role in promoting financial inclusion, providing access to financial services for those previously marginalized from traditional banking systems. CBDCs hold immense potential to boost financial inclusion, especially for those marginalized from traditional banking systems. With easy access via mobile devices and low transaction costs, CBDCs make financial services more accessible, especially in rural or remote areas.
Furthermore, the ease of account opening and cross-border transactions at more efficient costs supports migrant workers and those previously challenged by conventional banking services. For example, the Sand Dollar project in the Bahamas has showcased how CBDCs can expand access to financial services across the islands, allowing residents on remote islands to transact using just a mobile phone. Such initiatives demonstrate how CBDCs can be a crucial tool in promoting financial inclusion globally.
7. Monetary Policy Control
With CBDCs, central banks have an additional tool to implement monetary policy, allowing for more timely and effective interventions in the face of economic crises. CBDCs grant central banks enhanced capabilities to implement monetary policies. With better liquidity control and the ability to apply negative interest rates, central banks can respond more quickly and accurately to economic condition shifts.
Moreover, CBDCs allow for faster monetary policy transmission, such as direct stimulus provision to public accounts, and provide access to real-time transaction data. This capability is crucial as it allows for quicker responses to potential crises, maintaining economic and price stability. Additionally, swift and accurate actions from central banks in crisis situations can boost public trust in financial institutions and the government. Thus, CBDCs can be a vital tool in a central bank’s monetary policy toolkit, reinforcing their role in safeguarding a nation’s economic well-being.
While cryptocurrencies offer benefits like decentralization and privacy, the lack of consistent regulation and high volatility make them less ideal as a global financial standard. On the other hand, CBDCs, with the backing and regulation of central banks, promise a new era in a more stable, transparent, and inclusive global financial landscape.
In the context of modern diplomacy, the acceptance of CBDCs as a global standard can facilitate cross-border economic cooperation, strengthen bilateral and multilateral relationships, and advance sustainable development agendas. As a step towards a more integrated and harmonious future, CBDCs might be the key to transforming the global financial order.
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